Is economic theory wrong?

It’s an old question: Why are the poor poor? In particular, why would some people choose not to work, or to spend what little money they have unwisely?

Some experts say the poor are mentally ill or irrational — addiction, in fact, plays a big role. And surely opting out of the labor force or resorting to crime isn’t “rational.”

But others think such behavior makes sense. In “Losing Ground,” Charles Murray argued that welfare encourages bad choices. Only a chump earns money when the government will pay him to stay home.

Mr. Murray’s idea culminated in the 1996 welfare reform law, which placed a five-year limit on aid and required work after two years. The Associated Press recently reported that “[n]early one in six people rely on some form of public assistance, a larger share than at any time since the government started measuring two decades ago,” but fewer people receive cash benefits, and a higher percentage of those who receive aid also work. So Mr. Murray’s thesis has merit.

But this explanation is incomplete: Lots of people are still poor when, judging by their surroundings, they shouldn’t be. Even in countries without extensive welfare states.

In the highly theoretical “The Persistence of Poverty,” George Washington University philosophy professor Charles Karelis claims he’s found that elusive piece. It’s true that the poor are rational and that government can create perverse incentives, but the bigger problem is that poverty itself creates perverse incentives.

Mr. Karelis‘ argument lies in the economic concept of “diminishing marginal utility,” which holds that the more a person has of something, the less he values a given amount of it. For example, $100 means less to a millionaire than to a blue-collar worker. Theorists have often applied this to the very poor — $100 must mean a whole lot to them, so if they’re not trying to work, they’re not rational.

In response, the author proposes a thought experiment: Say you have seven bee stings. You’re offered enough salve to relieve the pain from one. But that salve isn’t worth much, because you hardly notice one sting among the six others.

Now say someone gives you six stings’ worth of salve, and only one sting still hurts. The same amount of salve will relieve a lot of pain now, so it’s worth more.

In situations like this — relief, not pleasure — marginal utility actually increases. The seventh dab of salve is more valuable than the first.

Take this idea and apply it to an unemployed person with a stack of bills to pay. Settling the first debt will take a lot of effort, yet won’t ease his nerves, so he’s not likely to try very hard.

Also, when the poor do have money, there’s an incentive for them to widely vary their spending. Say someone can afford to live in moderate poverty for two months — or they can use all the money to live comfortably the first month, but go without the second. This person would do better taking the latter option.

(The confused should think back to bee stings. It’s better to relieve seven stings one day, and hurt the next, than it is to relieve three one day and four the next. The latter situation puts one in constant pain.)

Great, in theory. But Mr. Karelis must show his ideas (a) explain real life and (b) can help sculpt successful policies. He does both.

The theory packs much explanatory power. It goes a long way toward showing why many poor people move in and out of the work force, and in and out of jail.